How much money does your company have available right now? That’s a question your cash flow statement can answer.
As its name suggests, a cash flow statement charts the flow of money into and out of your business. It’s all about gauging liquidity — or cash on hand — so that you can make smart decisions about paying bills and buying additional assets or inventory.
When viewed with your company’s income statement (a report of sales and expenses during a specific time period) and balance sheet (a summary of the net worth of your company on a given day), your cash flow statement gives you a complete view of your company’s financial profile. (Publicly traded companies are required to disclose all three statements to the SEC each quarter.)
Let’s break down a typical small-business cash flow statement and review each of its sections. Print or view this sample statement [PDF] to follow along.
What the cash flow statement tells you is simple: Operations Costs + Asset Investments + Financing = Cash on Hand
Operations costs: Also called operating cash flow, operations costs show how much you have spent or made on a daily basis. This includes cash that came in for the period and collections of sales previously made on credit, minus assorted regular expenses. It is the most accurate assessment of how much money you have generated from your core business. Total net cash is a number you want to see growing.
Asset investments: This section, also called cash flow from investing activities, shows the cash used to sell or buy long-term capital assets for your business. These assets may be equipment, property, machinery, vehicles, furnishings, or investment securities. Over time, you want to see that the business can pay for these investments with income from its operations.
Financing: Here you’ll find the cash received from or paid to lenders, other creditors, and investors (if you have them). For publicly traded companies, this is where cash flow from the sale of stocks and bonds, payment of dividends, or repayment of debt capital is reported.
Here are some common terms found in a simple cash flow statement and their definitions:
Accounts receivable (A/R): The amount your business is owed by customers for goods and services that they purchased on credit.
Accounts payable (A/P): The amount you owe creditors for purchasing goods and other operational equipment.
Current assets: All of your inventory, cash, work in progress, and receivables that will last or be used within a year.
Depreciation expense: When an asset has stopped contributing to the profit of your business and becomes an expense.
Inventories: The amount of your business’s current inventory.
Long-term debt: Debts that are due after a year or more.
Net cash balance: The total amount of cash deposited, minus any cash disbursements.
Net income: The amount remaining after you subtract all of your business costs from your total revenue.
Other current liabilities: A grouping of debts that are not covered under common liabilities, such as accounts payable.
Short-term notes payable: Debt that must be paid off in a short amount of time, usually in less than a year.